Unfair Competition (Basic Principles)

From Max-EuP 2012

by Ansgar Ohly

1. Concept and purpose

The general term ‘competition law’ is equivocal, as it may cover two areas: antitrust law (competition law (relationship between European and national law)) and unfair competition law. Both fields of law serve the common purpose of ensuring that competition in the internal market is not distorted (see Protocol no 27 TFEU/Art  3(1)(g) EC), thereby safeguarding one of the basic conditions of a functioning market economy. The immediate aim of regulation, however, differs between both disciplines of competition law. Antitrust law, for which competition law is used as a synonym in Arts 101 ff TFEU/Arts 81 ff EC and in some European jurisdictions (eg in English law) (competition (internal market)), controls the structure of markets. At a macro level it protects free competition against restriction. Unfair competition law (in German legal terminology also traditionally referred to as Wettbewerbsrecht, ie ‘competition law’), on the other hand, regulates market practices. At a micro level it provides rules for the behaviour of individual actors in existing markets.

According to Art 10bis(1) of the Paris Convention (PC), ‘any act of competition contrary to honest practices in industrial or commercial matters constitutes unfair competition’, whereas Art 5(1) of the EU Unfair Commercial Practices Directive (Dir 2005/29, hereinafter UCPD) simply prohibits ‘unfair commercial practices’. Commercial practices are characterized by their relation to markets. In this vein, Art 2(d) UCPD defines ‘commercial practices’ as ‘any act [or] omission … directly connected with the promotion, sale or supply of a product’. The concept of ‘(un)fairness’, however, cannot be defined in an abstract and general way. Unfairness is ‘a Proteus which turns to a thousand forms’ (Josef Kohler) and is thus not capable of being lexically defined. All general provisions prohibiting unfair competition at the international, the Union or the national level are general clauses, ie umbrella terms. Thus, both considerable flexibility and a certain degree of legal uncertainty are typical features of unfair competition law. In modern enactments, this uncertainty is reduced by a list of statutory examples (see 3. below). Also, the general notion of unfair competition allows the courts to develop rules and principles on a case-by-case basis and thus to proceed in a way comparable to common law methodology.

Contrary to what Art 10bis(1) PC suggests, the concepts of ‘unfair competition’ prevailing in Europe are by no means uniform. In EU law, the term as such is not used; the UCPD prohibits ‘unfair business-to-consumer commercial practices’ (Arts 2(d), 5(1)). In German law, the term ‘unfair competition’ encompasses all commercial practices which are prohibited by specific provisions or by the general clause of unfair competition law (§ 3(1) Gesetz gegen den unlauteren Wettbewerb = Act against Unfair Competition of 2004, hereinafter UWG) for the purpose of protecting competitors, consumers, other market participants and the general public (§ 1 UWG). In French law, concurrence déloyale is one of the categories of tort law which were developed by the courts on the basis of Art 1382 Code civil; it can be distinguished from the statutory provisions of consumer protection law. In English law, ‘unfair competition’ has never been fully accepted as a legal concept. Depending on the context, the term may be (i) a synonym of the tort of passing off, which protects trade goodwill against misappropriation by misrepresentation, (ii) a general tort of misappropriation of a competitor’s trade values, which is not recognized as such in English law, or (iii) a generic term covering all causes of action available to a trader against tortious behaviour of a competitor (Moorgate Tobacco v Philip Morris [1985] RPC 219, 235 ff (High Court of Australia)).

In particular, there is disagreement about the purpose of unfair competition law. Some jurisdictions (including Austria, Belgium, Germany, Spain, Sweden and Switzerland) adopt an integral or monistic concept which is based on a triad of purposes. According to this approach, unfair competition law protects competitors, consumers and the general public (see § 1 of the German UWG, § 1 of the Swedish Market Practices (Marknadsföringslag), Art 1 of the Spanish Act against Unfair Competition (Ley 20.169). Other jurisdictions (including France and England) distinguish between tort law protection available to traders, on the one hand, and consumer protection law, on the other (see 2. below). Whereas earlier EC directives adopted the integral approach (see Art 1 of the Directive on Misleading Advertising (Dir 84/450) in its pre-2005 version), more recent directives distinguish between consumer protection and the protection of traders. The UCPD only protects consumers against unfair commercial practices (Art 1 UCPD); its scope is limited to business-to-consumer (b2c) commercial relations. Whereas the directives on misleading advertising (Dir 84/450) and on comparative advertising (Dir 97/55) aimed at protecting ‘consumers, persons carrying on a trade or business or practising a craft or profession and the interests of the public in general’ (Art 1 Dir 84/450), the newly codified Directive on Misleading and Comparative Advertising (Dir 2006/114) only protects traders; it is only applicable to commercial relations between businesses (business-to-business, b2b).

2. Development and sources of law

This variety of approaches reflects the differences between European legal traditions. At the risk of oversimplifying, three models can be distinguished. The first model, which corresponds to Austrian, Belgian, Danish, German, Spanish, Swedish and Swiss law, is characterized by specific legislation which protects the interests of competitors, consumers and the general public and which prohibits unfair competition by a combination of detailed provisions and a general clause. Some of these statutes, such as the German UWG of 1896 and 1909, reformed in 2004, have a long tradition. The law is enforced (unfair competition (consequences)) either by civil actions brought by individual competitors, trade and consumer organizations (as in Austria, Germany and Switzerland) or by an administrative authority (such as a competition office or, in Scandinavia, the ombudsman). The second model, which is followed by French, Italian and, to some extent, Dutch law, distinguishes between tort law, which protects traders’ interests, and consumer protection law, which is primarily enforced by means of administrative or criminal sanctions. In France, the courts had already allowed a cause of action for concurrence déloyale on the basis of the general clause of tort law (Art 1382 Code civil) in the mid-19th century, whereas similar protection is granted on the basis of a statutory provision in Italian civil law (Art 2598 Codice civile). Sources of consumer protection law (consumers and consumer protection law), however, are consumer protection statutes such as the Code de la consommation in France or the Codice del consumo in Italy. This approach can be contrasted, thirdly, with the common law, which regards unfair competition law with scepticism (‘To draw a line between fair and unfair competition … passes the power of the courts’, Mogul Steamship Co Ltd v McGregor, Gow & Co (1889) LR 23 QBD 598, 625 ff (CA)). The role of continental unfair competition law is played by (i) economic torts which protect businesses against losses suffered in the course of trade (passing off, injurious falsehood, interference with contractual relations, inducing breach of contract), (ii) consumer protection legislation of a largely criminal or administrative legal nature, (iii) self-regulation of advertising, which in UK practice relegates the legal supervision of advertising into the second row (but see Art 52 of the Australian Trade Practices Act 1974, which prohibits misleading advertising and deceptive conduct and which is often applied in practice).

So far, these differences have prevented a detailed regulation of unfair competition law at the international level. According to Art 10bis(1) PC, the Member States are under an obligation to grant effective protection against unfair competition. Article 10bis(2) PC defines ‘unfair competition’ by reference to the equally general standard of ‘honest practices in industrial or commercial matters’. Art 10bis(3) PC lists three examples of unfair competition: causing confusion (No 1), discrediting competitors by false allegations (No 2) and misleading consumers (No 3). The WIPO has drafted recommendations for the application of Art 10bisPC, which are, however, not binding and which have been criticized as being too ‘continental’. The TRIPS Agreement does not prohibit unfair competition as such, but it provides for the protection of geographical indications of origin (Art 22) and of undisclosed information (Art 39), both of which are borderline areas between intellectual property and unfair competition law.

In the European Union, the disagreement about the systemic nature, the level of regulation and the means of enforcement have made the harmonization of unfair competition law a difficult task. For a long time, conflicts between national restrictions and the fundamental freedoms were in the foreground of legal attention (unfair competition and freedoms of movement). Directive 84/450 (advertising, misleading) obliged the Member States to grant protection against misleading advertising, but it only set a minimum standard and it allowed the Member States to choose between various means of enforcement. The harmonizing effects of this directive were therefore limited. Directive 97/55 amended the directive of 1984 by inserting provisions on comparative advertising (advertising, comparative). A significant step forward on the way to harmonization was made by the adoption of the UCPD of 2005. It aims at a full harmonization of unfair competition law in business-to-consumer commercial relations (for more details see 3. below). In 2006, the directives of 1984 and 1997 were newly codified (Dir 2006/114). Further legislative acts with relevance to unfair competition law are the directives on distance selling (Dir 97/7) (distance contracts), on injunctions (Dir 98/27), on price indication (Dir 98/6) on e-commerce (Dir 2000/31), on data protection in electronic communications (Dir 2002/58), on the distance marketing of consumer financial services (Dir 2002/65), on audiovisual media services (Dir 2007/65) and the Consumer Protection Cooperation Regulation (Reg 2006/2004).

Meanwhile, all Member States have implemented the UCPD. The national implementing provisions again reflect the differences between the models outlined above. Countries with specific and unitary legislation against unfair competition have implemented the provisions of the directive in their unfair competition acts. Many of the implementing provisions are equally applicable to b2c and to b2b relations, but there are also new provisions which distinguish between consumer protection and traders’ protection (see § 1(1) of the Austrian UWG, to some extent also § 3(2) of the German UWG). In France the implementing provisions were inserted into the Code de la consommation, and they will primarily be enforced by means of criminal law sanctions. In Italy the Codice del consumo was amended and the Competition Authority (Autorità Garante) was given supervisory powers. In the UK the directive was implemented by the Consumer Protection from Unfair Trading Regulations 2008. Both the Office of Fair Trading and the local Weights and Measures Authorities are in charge of enforcing the regulations. Unlike Ireland, however, the UK did not provide for a private law cause of action. At the same time the codes of advertising self-regulation, in particular Code of Advertising, Sales Promotion and Direct Marketing, were adapted to the UCPD. It can be expected that most disputes about unfair commercial practices will still be settled by self-regulation.

3. The UCPD: regulatory content and structure

The paragraphs of Art 5(1) UCPD proceed from the general to the specific. If applied in reverse order, they form a three-step-test. In a first step, Annex I to the directive sets out a ‘Black List’ of 31 practices which are to be regarded as unfair per se (Art 5(5)). At step two, specific provisions prohibit misleading (Arts 6, 7) and aggressive practices (Arts 8, 9) (commercial practices, misleading, commercial practices, aggressive). Unlike the ‘Black List’, Arts 6–9 do not prohibit these practices per se, but only when they are likely to have an impact on consumer choice. Mere harassment which does not interfere with the consumer’s freedom of decision-making, such as e-mail spamming, is excluded from the scope of the directive (but see No 26 of Annex I UCPD). The third and final step is constituted by Art 5(1), which prohibits unfair commercial practices in general. A commercial practice is deemed to be unfair if (a) it is contrary to the requirements of professional diligence, and (b) it materially distorts or is likely to materially distort the economic behaviour of an average consumer (Art 5(2)). Stricter conditions apply where commercial practices are addressed at a particularly vulnerable group of consumers (Art 5(3)).

The directive had to be implemented by 12 June 2007, and since 12 December 2007 it has been directly applicable. It aims at full harmonization; it thus neither allows more liberal nor more restrictive national provisions. For a period of six years, however, Member States may retain stricter law, provided it was passed in order to implement other EC directives (Art 3(5)). While initially the country of origin principle was to be included, Art 4 now only prevents the Member States from restricting the free movement of goods or the free movement of services for reasons falling within the field approximated by the directive. Although the scope of this provision is unclear, it can—subject to a different construction by the ECJ—be interpreted as a reference to the marketplace principle (Art 6(1) Rome II Regulation (Reg 864/2007)). Whereas, however, in unharmonized parts of unfair competition law the Member States can still rely on the grounds of justification set forth in Art 36 TFEU/Art 30 EC or on the mandatory requirements as recognized in the Cassis de Dijon rule (unfair competition and freedoms of movement), national restrictions which fall within the scope of the UCPD can only be justified if they can be based on the directive. Meanwhile the ECJ has held three provisions of national law to be irreconcilable with the UCPD: a Belgian ban on combined offers (ECJ Joined Cases C-261/07 and 299/07 – VTB-VAB and Galatea, [2009] ECR I-2949) a German provision which prohibited lotteries for the purposes of sales promotion unless the purchase of goods was not a condition of participation (ECJ Case C-304/08 – Plus, nyr) and an Austrian ban on free gifts (ECJ Case C-540/08 – Mediaprint, nyr). In these cases the ECJ held that per se prohibitions of particular commercial practices were only permissible if these practices were proscribed by the ‘Black List’ (Annex I UCPD). In all other cases unfair practices could only be prohibited by national law if they were likely to materially distort the economic behaviour of an average consumer. Since these provisions banned the respective practices per se, they were held not to be in accordance with the UCPD.

4. Conclusion and perspectives

The UCPD has harmonized a significant part of unfair competition law at a medium level between the formerly restrictive regulation of markets in Germany and the liberal approach of former English law. Given, however, the vagueness of its central provisions, the exclusion of commercial practices which do not have an immediate impact on consumer choice and the restricted relevance of some practices listed in Annex I, the harmonizing effect of the text of the UCPD will remain limited. Much will depend on the interpretation of the ECJ, which, according to the prevailing but by no means undisputed view, has full competence to interpret and apply even general clauses of EU law. What is more, the UCPD has not harmonized the sanctions and the enforcement (unfair competition (consequences)). Thus, the laws of the Member States will remain different in this respect.

As far as the protection of traders is concerned, only the provisions on misleading and comparative advertising (advertising, comparative) have been harmonized. The Commission has not put forward any further drafts as yet. In the remaining areas significant differences between the European jurisdictions prevail. There seems to be a widespread European consensus about how to deal with some issues such as disparaging of a competitor by false allegations, causing confusion, inducing breach of contract and the protection of trade secrets, which makes further harmonization of these areas look like a realistic possibility. Other questions, however, remain disputed for systematic reasons or for reasons of policy. There is, for example, significant disagreement about whether the imitation of products which neither deceives consumers nor infringes intellectual property rights is unfair. English judges emphatically deny protection whereas under the French doctrine of parasitic competition, relief can be granted. German law steers a middle course by prohibiting the offer of imitated products only where the imitation causes confusion, where it takes undue advantage or causes damage to the reputation of the original product or where the imitation was made possible by a breach of confidence (§ 4 No 9 UWG). It is also unclear to what extent the breach of statutory provisions law can trigger unfair competition sanctions. Whereas German law considers the breach of a market regulation as unfair competition (§ 4 No 11 UWG) and sanctions violations of provisions concerning regulated professions, product safety rules or statutes protecting minors from pornography under unfair competition law, the inclusion of such provisions into unfair competition law is unheard of in many other jurisdictions. In these areas harmonization is no more than a very distant prospect.

Literature

Eugen Ulmer, Friedrich-Karl Beier, Gerhard Schricker and Joseph Straus (eds), Das Recht des unlauteren Wettbewerbs in den Mitgliedstaaten der Europäischen Wirtschaftsgemeinschaft, 8 vols (1965); Anselm Kamperman Sanders, Unfair Competition Law (1997); Ansgar Ohly, Richterrecht und Generalklausel im Recht des unlauteren Wettbewerbs (1997); Hans Micklitz and Jürgen Kessler (eds), Marketing Practice Regulation and Consumer Protection in the EC Member States and the US (2002); Antonia Bakardjieva Engelbrekt, Fair Trading Law in Flux? National Legacies, Institutional Choice and the Process of Europeanisation (2003); Christopher Wadlow, The Law of Passing-Off (3rd edn, 2004); Frauke Henning-Bodewig, Unfair Competition Law (2006); Jochen Glöckner, Europäisches Lauterkeitsrecht (2006); Stephen Weatherill and Ulf Bernitz (eds), The Regulation of Unfair Commercial Practices Under EC Directive 2005/29: New Rules and New Techniques (2007); Martin Schmidt-Kessel and Silvan Schubmehl (eds), Lauterkeitsrecht in Europa—Eine Sammlung von Länderberichten zum Recht gegen unlauteren Wettbewerb (2011).

Retrieved from Unfair Competition (Basic Principles) – Max-EuP 2012 on 22 May 2022.

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